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VAT - A Quick Guide

The UK tax system is pretty complicated and VAT in particular causes many headaches for small businesses.  Here's a summary of the key aspects to help you determine whether you should be VAT registered and ensure you are on the best scheme for your business


VAT is a tax charged on the sale of most goods and sevices in the UK, usually 20% of the total price of the item in question.  Some supplies are exempt (such as medical services), but if that's not the case then you must register for VAT when you meet certain conditions, the most usual being that your turnover in the previous 12 months has reached £79,000 or more.  If you fail to register when you should, HMRC will charge you the VAT you should have charged your clients and probably fine you as well, so it's very important to be aware of the rules.

Once you are registered, you must charge VAT on the sales you make, but you are also able to reclaim the VAT you have paid to your suppliers.  For most small businesses, you then pay HMRC the difference between the two figures every quarter (or you get a refund if that's due)  

For example, the VAT calculation for a small business could be:

Total sales in quarter                       £30,000

Total VAT charged to clients            £6,000 (20% of £30,000)

Total purchases in the quarter         £5,000

Total VAT reclaimed                         £800  (this is less than 20% of the purchses since not all suppliers                                                              with be VAT registered so they won't all have charged VAT)

Payable to HMRC                              £5,200

If your clients are not businesses, being VAT registered invariably means that you have to increase your prices which may make you uncompetitive, so it can be important to avoid registration if at all possible.
For some businesses, it is actually beneficial to register for VAT voluntarily before you are required to do so. 
If your customers are all VAT registered, voluntary registration means that you can claim back the VAT on your purchases without having to put your prices up, since your clients can claim back the VAT you charge them.
If you supply ' Zero Rated' items, such as children's clothes, registration means that you can reclaim the VAT you have to pay but you charge VAT at 0%.